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Netflix vs Blockbuster Case 5

Netflix vs Blockbuster Case 5

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Competition in the Movie Running Head: COMPETITION IN THE MOVIE

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Case Study: Competition in the Movie Rental Industry in 2008: Netflix and Blockbuster Battle for Market Leadership Emilsen Holguin Excelsior College

Competition in the Movie Table of Contents

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I. Overview ..................................................................................................................... 3 II. Diagnosis of Strategic Issues ...................................................................................... 4 III. Application of Techniques of Strategic Analysis ................................................... 4 A. Competitive Forces: The Five-Forces Model of Competition ............................... 4 1. Suppliers ............................................................................................................. 4 2. Buyer Power........................................................................................................ 5 3. Threat of Substitution ......................................................................................... 5 4. Threat of New Entry ........................................................................................... 5 5. Competitive Rivalry ............................................................................................ 5 B. Market Position: Strategic Group Map ................................................................... 6 C. Industry Key Success Factors (KSFs)..................................................................... 7 D. Netflix’s Competitive Strategy ............................................................................... 7 E. Netflix SWOT Analysis .......................................................................................... 9 F. Blockbuster SWOT Analysis ................................................................................ 10 G. Financial Ratios .................................................................................................... 11 IV. Analysis and Evaluation ....................................................................................... 13 A. The Rental Movie Industry and Netflix’s Position ............................................... 13 B. Inside Netflix ........................................................................................................ 14 C. Inside Blockbuster ................................................................................................ 15 V. Recommendations ..................................................................................................... 17 A. For Netflix............................................................................................................. 17 B. For Blockbuster..................................................................................................... 18 VI. New Developments: 2010 Update ........................................................................ 19 Reference .......................................................................................................................... 21

List of Figures Figure 1. Strategic Group Map Application for Selected Movie Rental Services .............. 6 Figure 2. Netflix SWOT Analysis ...................................................................................... 9 Figure 3. Blockbuster SWOT Analysis ............................................................................ 10 Figure 4. Comparative chart: Operating profit ................................................................. 12

List of Tables Table 1. Comparative table: Financial Ratios (December 2007)...................................... 11 Table 2. Comparative table: Financial Ratios (December 2009)...................................... 20

2007). By using the internet.Competition in the Movie Case Study: Competition in the Movie Rental Industry in 2008: Netflix and Blockbuster Battle for Market Leadership I. 2009). The company aimed to become the bestcost provider. Netflix has an intuitive website (easy to use). In the beginning of 2007. and excellent customer service. free delivery” (Briki Media. Strickland & Gamble. As part of its competitive advantages. Netflix has been rated No. LLC. personalized movie recommendations. Netflix has grown to become the world’s largest online 3 movie rental service. Netflix’s subscription-based business model was a disruptive innovation in the movie rental business. Netflix is leading the movie rental market (Thompson. Netflix surpassed 6. Netflix focused on providing convenient and affordable prices for an entertainment industry that was already highly popular. and fast. Overview Since founded in 1999.3 million subscribers. 1 in online retail customer satisfaction by Neilsen Online for the past 3 years and for nine consecutive periods by Forsee/FGI Research (Netflix. Netflix’s strategy for success has included providing a comprehensive selection of movies. Based on a product that consumers already loved. These strategies ensured a competitive advantage to Netflix and threatened to make the traditional video store obsolete. With a catalog that includes more than 100. fast delivery.000 titles. a no-late-fees policy and a convenient drop-it-in-the-mail return system. an easy way to choose movies. . 2009). Netflix’s business model was profitable because it improved the consumer’s rental experience. an easy way to choose movies. A combination of its business model and strategic approach carry out the mission of the company: “Our appeal and success are built on providing the most expansive selection of DVDs.

e. Although they offer a unique product and there is no chance of substitution. They need each other.. Suppliers Netflix acquires its content from movie studios and movie distributors. Blockbuster. C104). p. . Movie studios and movie distributors make their revenue by selling its content to the largest number possible of viewers. but its competitors’ strategies for damage control and recovering market share are starting to affect Netflix’s competitive advantage. when a resurgent Blockbuster started to take over market share and forced Netflix to reduce subscription prices.Competition in the Movie II. other competitors are increasing their presence in the 4 market (i.e.. Netflix’s business model was a disruptive technology. was losing the battle until 2007. Competitive Forces: The Five-Forces Model of Competition 1. Diagnosis of Strategic Issues Netflix’s main competitor. III. Redbox) and new technology innovations (i. In addition to Blockbuster. The market conditions for Netflix have changed and the company needs to adjust and react to new developments. Netflix acquires content by buying DVDs. the relationship between Netflix and its suppliers is symbiotic. Application of Techniques of Strategic Analysis A. This reaction raised a red flag and caused a drop in Netflix’s stock price. paying a fee to license content and signing revenue-sharing agreements (Thompson et al. VOD and DVR) are changing the business environment. paying on a fee-perDVD basis. 2009.

via mail (2. Netflix’s subscribers easily find ways to watch movies. The main movie rental competitors for Netflix are Blockbuster . Competitive Rivalry In 2007.3 billions) and vending machines (400 millions).5 billion market in the United States. Threat of Substitution Netflix competes for customers by offering almost any kind of movie broadcasting. on-demand (1. with no fees for canceling the subscription. Netflix had 8. They can watch movies from cable companies. online services. there is virtually no cost for switching to other provider. Individually Netflix’s customers have little buyer power. movie rental or movie distributor. 2009. New entries to the online rental movie 5 business would face high costs and require state-of-the-art technologies to compete effectively. DVD vending kiosks and rental stores. Movies can be rented in-stores ($5.0 billions). The substitution of Netflix subscription is viable and easy. however.4 million subscribers (Thompson et al.8 billions). 3.Competition in the Movie 2.. 5. the movie rental business accounted for a $9. Threat of New Entry Netflix’s economy of scale and distribution systems place a high barrier for new entries to this market. 4. p. By July 2008. C102). Buyer Power Netflix sells its subscriptions to those who prefer online-only browsing and mailbox delivery. movie theaters.

the threat of substitution and the threat of competitive rivalry can affect a company’s ability to make sustainable profit in the movie rental business. Netflix’s competitors offer the same products for almost the same price. Market Position: Strategic Group Map Industry competitors . buyer power. Blockbuster. number of queues. The five-forces model of competition for the movie rental industry shows that supplier power. Strategic Group Map Application for Selected Movie Rental Services .Competition in the Movie 6 and Redbox.. personalized recommendations.are evaluated here in terms of added value (instant movies. Movie Gallery and Redbox . However. stores and vending machines). B. and the threat of new entries do not represent a strong force against a company’s market position.Netflix. 2009. etc) and market coverage (online. p. The size of the circle is representative of market share relative to others in the industry. (Thompson et al. Figure 1. C99).

CO). The Redbox business model is focused on fully automated kiosks that holds approximately 630 DVDs and are placed in strategic locations (such us major groceries stores. Netflix has less coverage because it limits its coverage to internet users. C. but its customers receive less value for their money. Also. Netflix offers a large range of subscription .Competition in the Movie The strategic group map (Figure 1) illustrates that the closest rival for Netflix is Blockbuster. Although the company is relatively new (first market test launched in 2004 in Denver. Blockbuster has a strategic advantage by offering rental movies through stores. 7 The strategic map also reveals the presence of a new player in the business game: Redbox. Netflix’s Competitive Strategy Netflix applies a best-cost provider competitive strategy. pharmacies and restaurants) (Redbox. internet and vending machines. Movies are an affordable entertainment that almost everyone loves. the company is growing its market share rapidly. Industry Key Success Factors (KSFs) The key success factors that affect movie rental players the most are: • • • • • • • overall low costs market coverage large selection of movies updated catalog (new releases in stock) ability to provide fast and convenient service customer-centered approach state-of-the-art technology and distribution systems D. it reveals that although Netflix’s customers receive more value for their money. 2009).

99 up to $47. • A Netflix customer has a broad selection of subscriptions plans starting at $5. all for a fixed price. Subscribers can watch “instant movies” on the internet. 2009). offering separate viewing choices to individual family members. • Netflix adds value in many ways. 2009.” so they can see each other's rental queues and make additional viewing suggestions (Netflix. It provides each account with as many as five separate rental queues (with ratings-based parental controls).Competition in the Movie plans to meet their consumers’ needs and added “convenience” to offer customers more value for the money. Users can invite each other to join a “friends list. p.. Movies are delivered and returned by 8 mail. the Netflix system learns one’s taste and offers personalized lists of recommendations.99 – from two movies per month to unlimited numbers of movies anytime (Thompson et al. Netflix has no due dates or late fees. Based on one’s ratings. C101). .

This puts the company in an advantageous position to continue gaining market share. .Competition in the Movie 9 E. Netflix SWOT Analysis Figure 2. the company needs to move fast to keep up with technology and innovations. Netflix has a long list of strengths and opportunities. Netflix SWOT Analysis As shown in Figure 2. However. Netflix’s customers are used to state-of-the-art technology and they probably welcome novelty in delivering formats such as VOD.

Blockbuster SWOT Analysis 10 Figure 3. its challenges are greater because the company is losing reputation and is already behind in using technologies and distribution systems. conditions such as slowing numbers of movie DVD rentals and an economic slowdown can be highly detrimental. Blockbuster SWOT Analysis Although Blockbuster has a good list of strengths and opportunities (as shown in Figure 3).Competition in the Movie F. . For a company that is in recovery mode.

Netflix generates $1. From Blockbuster’s perspective.008 0.7 1.862 0.10 1. C110). Financial Ratios Ratios Working capital Debt to Equity Long term debt to Equity Return on Assets Assets turnover Operating Profit Netflix 203. C106. Comparative table: Financial Ratios (December 2007) The financial ratios above are based on financial data from 2007 fiscal year (Thompson et al. High long-term debt equity undermines the company’s capacity to borrow .027 0.075 Blockbuster 30. Blockbuster’s debt to equity ratio (1. This is confirmed with its very low (0. The company shows considerable capacity to borrow additional funds if needed. Netflix’s debt-to-equity ratio is only 0.862 sales for each dollar of assets.Competition in the Movie 11 G.50 which shows that the company is creditworthy and has a strong balance sheet. In addition.96 1. p. Netflix is highly liquid and has more than enough solvency to cover expenses.96) indicates excessive debt and a weak balance sheet.9 0. 2009.007 Table 1.50 0.7). This can represent a significant challenge to cover its operating expenses.015 -0.031 2. its working capital is very low (only 30..008) long term debt to equity ratio. In addition.

Blockbuster generates $2.15 -0.2 -0.3 -0. unfortunately.05 -0. In contrast. Netflix’s trend over time is upward. The chart below compares operating profit ratios for Netflix and Blockbuster from 2002 to 2007. its operating profit is very low.25 -0.1 -0. p. At the time of this analysis.1 0. its flatten out of operating profit during that period was “primarily the result of an increase in personalrelated costs due to the growth in headcount and expenses related to the development of solutions for the Internet-based delivery of content” (Netflix. According to the 2007 notes in Netflix Annual Report. The operating profit ratio is best used to compare a company’s results over time to reveal trends.027 sales for each dollar of assets. 47). 2007.35 Year 2002 2004 2005 2006 2007 Blockbuster Netflix Figure 4. Comparative chart: Operating profit . The chart shows a rapid decline in Blockbuster’s operating profits from 2002 to 2004. The operating profit margin or return on sales shows the profitability of current operations (not including interest charges and income taxes). which is a good indicator.Competition in the Movie 12 additional funds.05 0 Operating profit -0. followed by a recovering curve until 2006. Blockbuster’s operating profit trend was falling in negative direction. Comparative chart: Operating profit 0.

A company that wants to succeed in the movie rental industry must apply strategies to keep customer satisfaction high and to promote consumer loyalty. streaming videos. A movie rental business competes with any kind of movie broadcasting business (cable. • ability to provide fast and convenient service (Online instant movies and mail delivery). In contrast.000 titles). etc). The Rental Movie Industry and Netflix’s Position The five-force model of competition shows that in the rental business the main 13 threats are substitution and competition. theaters. they do not represent a direct threat to Netflix. . the competition for market share with Blockbuster is evident. Blockbuster has a large market share and has a wide geographic coverage.Competition in the Movie IV. movie rentals. Analysis and Evaluation A. If Blockbuster implements strategies to add value to its customers. Netflix can face a significant challenge that could harm the direction of the company. Netflix is especially good on most of the key success factors for the movie rental business: • • • overall low cost (an upward trend on operating profits). updated catalog (Netflix offers new releases the same day they are available in the market). Success in the rental movie industry depends on seven factors. In the Strategic Group Map (Figure 1). large selection of movies (with a catalog of more than 100. Although Movie Gallery and Redbox together have a significant presence in the market.

• Netflix’s market coverage is limited to internet users. its intuitive website allows customers to make all transactions. keeping low levels of debt.2% of the American populations. It has been able to offer additional benefits to its customers while controlling its expenses. the titles were limited and the movies had to be watched on a computer . B. 2009). Netflix’s most significant weakness was the lack of stores and the difficulty for subscribers to have immediate access to movies. In 2007. Movies arrive within one business day). Although “instant movies” were available. Inside Netflix Netflix has been successful in applying the best-cost strategy. in addition. According to Internet World Stats.Competition in the Movie • customer centered approach (Netflix policies are customer friendly. the percentage of penetration of the internet in the North American population in 2009 was 74. Although it only provides online rental services.2% (an increase of 134% since 2000). Netflix is a very profitable business that has built on its first mover advantages and created a business model that promotes customer satisfaction and technology innovation. This rate indicates that Netflix could reach 74. Netflix offers phone help available 24 hours a day) and • 14 state-of-the-art technology and distribution systems (Netflix system learns to customer taste and personalize recommendations. which adds market coverage to Netflix’s list of key success factors (Miniwatts Marketing Group. and continuing to increase net income. the rapid increase of internet users will help the company to convert this weakness into an opportunity.

In its effort to recover its market share. the company has been losing money. Large amounts of working capital. high rates of asset turnover and a positive trend of operating profit makes the company attractive for investors and ensures financial stability. This initiated when Blockbuster launched an ad campaign that communicated their value proposition: “Get 4 movies by mail and trade them for in-store movies. Netflix needs to take advantage of its opportunities to continue its growing trend and avoid a contraction cycle. making the war for market share more competitive. customers were surprised by changes to the rental policies and new promotions each time they visited the stores. C. In addition. Netflix’s financial ratios confirm the financial health of the company. The policy changes were frequent to the point that store employees delivered . instead. competitors are getting close enough to force Netflix to lower the price of its subscriptions. competitors had emulated Netflix online services. Since 2003. Its most attractive opportunity is the growing awareness of video streaming technology and its promising partnerships with gaming console manufacturers to offer video on demands. Inside Blockbuster The main problem with Blockbuster is the lack of a defined strategic approach. as often as you like for $20 a month” (Steele. The biggest threat for Netflix is to overcome the business cycle of its model.Competition in the Movie 15 screen. Netflix’s business model is at its peak. Blockbuster used to set its own price standards until Netflix came aboard. para 1). However. the company did not persist in a clear strategy. 2009. low levels of debt. the company tried to add value to its memberships.

Blockbuster has a reasonable selection of movies. vending or digital download.Competition in the Movie negative and confused messages to customers. 2009. In spite of this advantage. offers convenient access to movies across multiple channels (stores. high levels of debt and negative trends of operating profits make it . Employees and customers were puzzled about what the current policy was. However. In addition to its internal difficulties. a strategic alliance to deploy Blockbuster-branded DVD vending machines for movies and video games and a video streaming technology. A low amount of working capital. Blockbuster’s recovery efforts are being slowed down by the country’s economic recession and a consumer trend to rent fewer DVDs. in Blockbuster’s case. Blockbuster is the only company to make media entertainment available across multiple channels. 16 Blockbuster is subject to the same list of key success factors as Netflix. Blockbuster’s financial ratios reveal a poor financial performance. A consumer can rent movies at traditional stores. Blockbuster’s diversified delivery channels is the company’s strongest competitive advantage. However. the company is weak in maintaining overall low costs. Blockbuster has lost reputation and has dealt with high operating costs that make it a difficult to challenge a strong competitor like Netflix. the company counts on its infrastructure to take advantages of opportunities such as a growing market for game rentals. The company promotes that the fact that “the same customer may choose different ways to access media entertainment on different nights” (Blockbuster Corporate. by-mail. it has seen a decrease in customers’ satisfaction and has struggled with efficiency in its distribution systems. an updated catalog (although movies are not always in stock). In its favor. para 4). online and vending machines) and has a global presence.

Recommendations 17 A. • Continue to increase its number of titles available and seek to include music digital content. Partnerships with TV and game consoles manufactures can give Netflix a new distinctive competence. Netflix must continue improving customer satisfaction rates and customer retention rates.015) makes it difficult for Blockbuster to find external funding to support its new strategies. but to keep its leading position in the market. Its high ratio of long-term debt to equity (1. Netflix should aim to download its digital content directly to TV screens. which allow customers to instantly watch TV episodes and movies streamed from Netflix. The company enjoys key success factors needed in the movie rental business.000 full-length movies and television episodes were available for streaming over the Internet to computer screens. .) • Take the first movers’ advantage of digital technology broadcasting. For Netflix The market environment for Netflix has changed and the company needs to adjust its strategies in order to avoid a contraction cycle. • Increase the number of digital content movies available in its catalog (in 2007. The following recommendations can help Netflix keep its front running position in the market: • Design a marketing campaign to raise awareness of the advantages of video streaming technology. only 12.Competition in the Movie difficult for the company to attract investors. V.

For Blockbuster On the other hand. Blockbuster continues working in a recovering mode. • Increase awareness of the company’s social responsibility. but it fails to reward its customers for helping the company in its marketing efforts. A priority for Blockbuster must be to become profitable. Netflix should offer a discount price for loyal customers who want to pay for annual subscriptions. Netflix sells “gift subscriptions” and sends by mail “free-trial” coupons. It can do this by: • Building a business model that is sustainable and has the flexibility to adapt to competitive threats without eroding value. These kinds of program are powerful ways to build a company brand and to ensure future loyal customers. A free-month or a special discount in membership prices would motivate customers not to trash those “freetrial” coupons.Competition in the Movie • Design annual memberships to reward loyal customers. Netflix could create special programs (contests or collections of points) to allow schools to receive free subscriptions. • 18 Design a referral program. The company needs to reduce its operating costs and to design an effective distribution system.2 millions.1 million). Although some of its strategies have been working and the company saw a small recovery in 2006 with a modest profit of 39. B. . The conditions for Blockbuster are more challenging because of its weak financial situation and damaged reputation. the boost did not last long and the company went negative again on 2007 (registered a loss of 85.

Blockbuster should quit fighting Netflix and focus on creating a new niche market. Also. . Redbox’s system offers online reservations. Blockbuster took too long to fight back Netflix’s strategies and currently the company does not have financial resources to compete against this giant rival. In addition. • Taking advantage of new technologies to reduce its operating costs and to improve customer service. New Developments: 2010 Update In September 2009. This represents a significant threat to Blockbuster’s network of kiosks (only 497).Competition in the Movie • 19 Identifying appropriate strategies and creating company policies to ensure that employees deliver consistent and reliable information to its customers. In addition. another market where Netflix does not compete and that is growing in numbers. Blockbuster announced a major store closing initiative that could result in the elimination of 22% of its current freestanding store bases (Pardy. However. Blockbuster’s global infrastructure provides the company with unique geographic markets where Netflix is not present. Redbox has become a major player with more than 19.6 million current subscribers. which has only 1. 2009. the company continues promoting its "Total Access" program. para 1). Redbox does not have late fees and customers have up to 25 days to return their DVDs.000 kiosks placed nationwide by the end of 2009. Movie rentals could become “the added value” for video game rental consumers. Investing efforts and resources to build distinctive competitiveness in markets where Netflix is absent gives Blockbuster a better chance of recovering its competitive advantage. VI. Blockbuster offers rental of video games.

By January 2010.29% 6.14% 4.80M Table 2. 2009 (Yahoo! Inc. 2010)..01% 107.79% 11. blue ray players and HDTVs.31% -452. .Competition in the Movie 20 allowing customers to choose their favorite titles online and pick them up immediately at the preferred Redbox location (Redbox.66% 20. 2009). Ratios Return on Equity Return on Assets Profit Margin Operating Profit Net Income Netflix 38.15% -10.68 M Blockbuster -119.) The table below summarized the main profitability ratios and profit information for Netflix and Blockbuster as of December 31. while Blockbuster continues to get worse. Netflix’s base of customers was about 10. Comparative table: Financial Ratios (December 2009) It is clear that Netflix continues to maintain a strong position in business.6 million subscribers and the company was launching a strong marketing campaign to promote its “instant movies” that could be downloaded directly to TV screens (with the help of several devices such as game consoles.70% 3.

Retrieved from http://www.html Miniwatts Marketing Group. (2009). Fact sheet.cfm Netflix.hackingnetflix. World internet usage statistics.shareholder. New York..netflix. (2009). September 16). Retrieved from http://redboxpressroom. December). January). (2010.com/stats. N. (2009.costar.com/corporate/news Briki Media. D. Strickland. Death by a thousand paper cuts (aka. July 1). LLC. E. Retrieved from http://www. Retrieved from http://ir.mindspace. A.yahoo. III. Retrieved from http://blog. (2009. & Gamble.com/factsheets/TheHistoryofRedbox. Hacking Netflix. September 30). January). 2007 annual report.pdf Pardy.Competition in the Movie 21 Reference Blockbuster Corporate . Retrieved from http://www. A.com/annuals. key statistics. Retrieved from http://files.com/ . Retrieved from http://www.com/2009/08/netflix-posted-a-128-page-internalpresentation-on-the-company-culturereference-guide-on-our-freedomresponsibility-culture.com/downloads/NFLX/823470738x0x295021/422b46fbca67-47a6-be19-36879cf977fe/IR_Fact_Sheet_05_15_09. Sixteenth Edition. A.net/?p=186 Thompson. May 05).Y.htm Netflix.com/News/Article. Blockbuster closing up to 960 stores through 2010. (2009. The History of redbox. J. J.: McGraw-Hill/Irwin Yahoo! Inc.internetworldstats. Company overview.aspx?id=CE22237D7F77AE8FED9161447 C2874B Redbox. Jr. S.pdf Steele. (2009. December). Retrieved from http://finance. (2009. (2009. Yahoo! finance.blockbuster. (2007. the blockbuster pricing strategy). Crafting & Executing Strategy: The Quest for Competitive Advantage: Concepts and Cases.

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